Investors find opportunity in a country with high barriers to entry
By Allen Lynch
As investors look outside of the United States for opportunities in the seniors housing and care market, their attention is increasingly turning eastward to the one country that has long been the dream target market of other industries: China.
With its population rapidly aging and incomes increasing, China offers a potentially lucrative seniors housing market. However, despite the demographics and the erosion of familial elder support, persistent cultural attitudes toward elder care and opaque local bureaucracies present formidable obstacles for foreign investors.
China’s aging crisis looms
A combination of demographic factors will soon create a significant need for elder care in China, dwarfing what we will see in the U.S. Of China’s approximately 1.3 billion citizens, 121 million were age 65 or older in 2013 (compared to approximately 42 million in the U.S.).
The average life expectancy in China is expected to increase to 75 years by 2020, up from 68 in 1990. This increase in life expectancy, coupled with the now emerging effects of China’s one-child policy, has created a kind of “perfect storm” for its aging society.
The number of seniors is expected to increase to 171 million in 2020, and grow to 440 million by 2050 — exceeding the entire projected U.S. population. At that time, persons 65 or older will represent approximately one-third of China’s population. While it may be the key driver, China’s rapidly aging population is just one of several factors pointing to a strong future market for seniors housing and care there.
Government wants more seniors housing
Recently, the Chinese government made the development of seniors housing and care communities a national priority. According to its current Five-Year Plan for Elderly Care, the government wants to increase the percentage of elderly occupying seniors care facilities from less than 2 percent currently to between 3 and 4 percent while the plan is in effect.
Many of the restrictions on foreign investment in the construction of seniors housing have been lifted. The national government even held conferences with developers in an attempt to encourage foreign investment. It’s a welcome change from the days of banning foreign investment, but that doesn’t mean that the government has made it easy.
Five-year plans and what local officials actually do are two very different things. Local officials have enormous power in the process, emanating from the fact that the state owns the land.
Local officials make the regulations and have wide latitude in determining what gets built, for what uses and at what cost. The regulations are often confusing, and vary substantially from jurisdiction to jurisdiction. Doing business in China is highly relationship- and protocol-driven, making it crucial for foreign participants to partner with local developers.
Overcoming other barriers to entry
The most challenging obstacle facing foreign investors may have nothing to do with bureaucratic barriers, however.
Historically in China, elders have moved in with younger family members who support them during their later years. With younger relatives bearing the responsibility for elder housing and care, the Chinese have had little desire for — and thus experience with — a U.S.-style professional approach.
Indeed, up until the recent past, the very idea of institutionalizing a familial obligation was regarded as shameful and a “loss of face” except in the case of hospitalization. To some, the Chinese have begrudgingly started to accept the idea of a U.S. type of approach to senior living and care only because the traditional arrangement is not sustainable.
In and around urban areas, when a young family has been unable to care for an elderly parent or grandparent, the local hospital has been an acceptable option. As compared to the Western model, Chinese hospitals have been much more willing to allow lengthy stays by elderly patients, reducing the need for assisted-living type services. But many of these hospitals have begun to have capacity issues and, with the official encouragement of the national government, are beginning themselves to shift to a more Western, acute care approach.
Then there is the issue of cost, as few among today’s elderly in China can afford the cost of housing and care. Peel away the 7 percent growth and you see that it is among the younger, working population where income is rising and GDP growth is being driven. This phenomenon is often expressed as “the old aren’t rich enough and the rich aren’t old enough” when it comes to seniors housing and care.
And yet, many of these rising income earners are only children. Whereas large, young families were previously able to support elder relatives, it will become more difficult for someone of working age to support — both financially and physically — two parents and potentially four grandparents at the same time. Today’s luxury may become tomorrow’s necessity.
The relatively recent migration of young people of working age to the coastal cities may also disrupt traditional housing patterns. As the younger generations flock to the cities, seniors are often left behind in rural communities. Without the option of traditional support by relatives, seniors housing communities may become a more attractive (and necessary) alternative.
Structuring the opportunity
Intrepid investors look at these barriers to entry as a numbers game. Even a very shallow penetration of the potential market, they surmise, could yield substantial success. Yet few, if any, are going it alone. Investors are pursuing joint venture agreements with a Chinese partner.
Typically, the Chinese partner will set up a separate project entity and purchase the target land-use rights. The Chinese company and foreign investor will then enter into a joint venture to manage the property, or the two partners will enter into a vesting ownership agreement in which the Chinese company owns the land rights and the foreign investor has an interest in an entity with management rights to the project.
The type of land rights acquired become very important to how the project will be marketed to prospective residents. Although land zoned for commercial and residential purposes is more expensive, the rights associated with such land allow the investor to market the project through an ownership or equity investment model, which is more popular with Chinese seniors. Paradoxically, obtaining other land rights would be cheaper and would provide the investor with greater assurance that the project will be occupied by seniors through use of a rental model.
The future is in the East
With an aging population and growing pressures on the traditional familial approach, China offers a potentially lucrative market for seniors housing and care investment. In the near term, however, foreign investors in China must be willing to bear substantial risk in a market where no proven models presently exist.
For the first movers who have the resources — and appetite — to bear the risk, tying up strategic relationships with Chinese developers may provide them with a competitive advantage for years to come. But as these trailblazers tame the wilderness and learn from their mistakes, they will also no doubt leave a path for other U.S. investors to follow.